Warren Buffett is considered to be one of the best investors alive today. And there’s good reason for it. Having started with a relatively modest sum at the age of 11, he went on to build a fortune in excess of $100bn over the course of his lifetime.
Replicating his returns is no easy feat. In fact, countless professional and retail investors have tried and failed. However, by following his advice, it’s possible to boost a portfolio’s performance. And even a slight bump in returns over the long run can have a monumental impact thanks to compounding.
This can be especially handy for individuals with no significant savings in the bank right now. It’s common knowledge that having a decent lump of cash in an interest-bearing savings account is a sensible move. After all, it provides a backup source of funds should unexpected expenses crop up, such as a car breaking down.
So let’s explore how investors can start building wealth using Buffett’s tactics to put themselves on the path to financial freedom.
Walk, don’t run
Despite the depictions in movies and TV shows, investing largely consists of reading and waiting. All too often, new investors try to jump in as quickly as possible to build a diversified portfolio of exciting businesses. And this is a crucial mistake.
While there are thousands of stocks to choose from, the reality is that only a small number of these are actually worth owning. Even the biggest businesses around today could be lacklustre investments in the long run. In fact, a quick glance at the FTSE 100 demonstrates this perfectly. The businesses in the UK’s flagship index today are vastly different compared to 30 years ago. And it’s highly likely the same will be true three decades from now.
Therefore, jumping in guns blazing is likely to end in lacklustre results. And in some cases, wealth may actually end up being destroyed. Instead, Buffett has always encouraged taking a slow, disciplined approach. Every candidate for a portfolio needs to be carefully scrutinised for strengths and weaknesses. Only then can an informed decision be made.
Keep things simple
The stock market is home to a vast collection of businesses operating in a wide spectrum of industries. It can be prudent to own companies across different sectors to benefit from the advantages of diversification. However, Buffett has always strictly stayed within his circle of competence.
Businesses can be immensely complicated. This is especially true for stocks within the mining or biotech industries, which require a lot of understanding to dissect drilling and clinical trial results. And suppose an investor can’t properly analyse what’s being reported. In that case, it’s impossible to make a smart decision without pure luck. And luck is not a viable strategy for long-term success.
Personally, I struggle to understand the fashion industry. Therefore, following in Buffett’s footsteps, I simply don’t invest in these types of companies, regardless of how promising they seem. While this may sound obvious on the surface, all too often, investors, even professionals, can be led astray by the fear of missing out.
The post No real savings? I’d use the Warren Buffett method to target financial freedom appeared first on The Motley Fool UK.
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